One of Tuesday’s fears was that the ECB’s 442 billion Euro or $543 billion one-year loans to banks were to be repaid Thursday. A year ago, the ECB underwent a long-term repo to inject funds into a struggling banking market. This was seen as an opportunity to see how much and how many banks were in trouble and would be unable to pay back these loans. The estimate was for 250 to 300 billion Euros would need to be rolled over, this time in 3-month loans. However, the central bank announced that only 131.9 billion Euros were needed, which helped calm some of the fears that we were about to catch a second wave of bank failures in this refunding. It was also important that the demand for funds was not as great as anticipated because the upcoming Euro-zone “stress test” results for banks will be released starting in just a few weeks. Analysts keep looking for news that will indicate the number of banks in trouble, unable to meet the capital requirements. The good news is that the results haven’t been nearly as dire as were anticipated.
Yesterday was the end of the month and the end of the second quarter. The averages were met with more mixed economic data. The Mortgage Bankers Assoc. reported mortgage applications for the week ending June 25th rose 8.8%. This report can fluctuate wildly between -10% and plus 10% weekly. Applications sank after the April deadline to enter into a contract to get government credit. But there has been some surprisingly positive action in June. Since we’ve seen nothing but miserable data on housing, I thought I’d throw you a bone. ADP’s estimate on private sector jobs came in at just 13,000, well below the 60,000 anticipated. That has investors bracing for bad news come Friday. It’s no surprise, but clearly disappointing. The Chicago Purchasing Mangers’ Index on Manufacturing is the last of the major regional reports before today’s ISM Index. The 59.1 reading for June topped estimates for 59.0, although still down from 59.7 in May. What is in this report was a positive surprise. New Orders did slip, but only to 59.1 from 62.7, still a solid number. Production actually increased to 64.2 from 61.0. However, that didn’t stop manufacturers from dipping into inventory to meet demand. Inventories fell back under the breakeven mark to 46.5 from 56.4. This is yet another report that showed a dip in May, but a bounce in June. Even employment rose to 54.2 from 49.2. If the ISM could give us numbers like this today, we’d be pleased.
S & P 1040 is an obvious support level. However, the idea that it is a “head and shoulder top” pattern ignores the other requirements for such a pattern. First of all, the market climb to 1150 was a gradual rise with modestly higher highs on weaker volume. “Left shoulders” should rise rapidly and on significant volume. The April peak was a rally that was both more aggressive and on better Breadth and Volume statistics. The so-called “head” lacked the negative divergence of its component data that would then be the catalyst for the failed rally. Instead, the correction we saw was aggressive, challenging the 1040 level to make the “neckline”. This set up the oversold bounce that has been viewed as a “right shoulder”. While volume was light on this advance, it appeared to be more of a bounce in a base-building pattern. Breaking below 1040 does break “support”, but the pattern is not necessarily a head and shoulders top, which carries with it the implication of the start of a prolonged down trend. If it were a head and shoulders top, the range (1040 – 1220) would project to 860, which is the target put out by Goldman Sachs’ analyst. I see this as too dire a prediction and many are reading into the pattern a more ominous top. I don’t think this is a head and shoulder top. The recent high swung 25 points above resistance. A “swing rule” break would take us to 1015 as the next support. That also happens to be right about the high following the breakout of the 2008/2009 base below 950. The current downtrend has support at 979. Therefore, there are “stair-step” support points all the way down.
I still think that earnings produce a rally in July. The target was 1150 – 1170. That may be harder to achieve now, but we may give it a go. As we push on into early fall, we are expecting another wave lower. This will be driven by still weak economic data, but made worse by the fact that we will be facing a down fiscal year for those using September. Down years often put pressure on September, as portfolio managers scramble to get rid of losers and put in a few winning names. It is also election season in October. With it comes uncertainty as to who wields the power in the Senate. The mud will fly heading into the elections, typically sidelining large investment types. Our target for September/October is 950. In our Cantor Global Outlook 2010 piece written back in November/December 2009, we were looking for a high of 1200 and then a fall correction of 15% - 20%. A 20% correction would target 960 by October. We have not deviated from that projection. Our target at the time was to finish 2010 at 1224, a strong bull market rally off of that October low. This expectation remains intact for yearend.
We’ll see how much traders want to read into the S & P breaking 1040 on the final trading day of the quarter. If the shorts don’t get an increase in the level of panic, they may wish to cover quickly. Even as the S & P rolled over, the Volatility Index, VIX, traded lower for all but in the final few seconds of trading. Where’s the fear? The fact is that the market has been moving to discount disappointment for the past two months. Perhaps the reality isn’t quite as bad as the preparation. The end-of-quarter unwinding put pressure on stocks in the final half hour. Today will be the test. If the ISM is anything like the Chicago PMI, the shorts will get frustrated that breaking 1040 did not give them the gift they were all hoping for. Don’t stand by the exits. I think the bears could make a run for it today or tomorrow. After all, everyone is expecting bad news from Euro-zone banks, Chinese growth, today’s ISM, tomorrow’s jobs, and even earnings. We broke 1040. All of this bad news, if it doesn’t create a panic, should result in short covering.
One of Tuesday’s fears was that the ECB’s 442 billion Euro or $543 billion one-year loans to banks were to be repaid Thursday. A year ago, the ECB underwent a long-term repo to inject funds into a struggling banking market. This was seen as an opportunity to see how much and how many banks were in trouble and would be unable to pay back these loans. The estimate was for 250 to 300 billion Euros would need to be rolled over, this time in 3-month loans. However, the central bank announced that only 131.9 billion Euros were needed, which helped calm some of the fears that we were about to catch a second wave of bank failures in this refunding. It was also important that the demand for funds was not as great as anticipated because the upcoming Euro-zone “stress test” results for banks will be released starting in just a few weeks. Analysts keep looking for news that will indicate the number of banks in trouble, unable to meet the capital requirements. The good news is that the results haven’t been nearly as dire as were anticipated.
Yesterday was the end of the month and the end of the second quarter. The averages were met with more mixed economic data. The Mortgage Bankers Assoc. reported mortgage applications for the week ending June 25th rose 8.8%. This report can fluctuate wildly between -10% and plus 10% weekly. Applications sank after the April deadline to enter into a contract to get government credit. But there has been some surprisingly positive action in June. Since we’ve seen nothing but miserable data on housing, I thought I’d throw you a bone. ADP’s estimate on private sector jobs came in at just 13,000, well below the 60,000 anticipated. That has investors bracing for bad news come Friday. It’s no surprise, but clearly disappointing. The Chicago Purchasing Mangers’ Index on Manufacturing is the last of the major regional reports before today’s ISM Index. The 59.1 reading for June topped estimates for 59.0, although still down from 59.7 in May. What is in this report was a positive surprise. New Orders did slip, but only to 59.1 from 62.7, still a solid number. Production actually increased to 64.2 from 61.0. However, that didn’t stop manufacturers from dipping into inventory to meet demand. Inventories fell back under the breakeven mark to 46.5 from 56.4. This is yet another report that showed a dip in May, but a bounce in June. Even employment rose to 54.2 from 49.2. If the ISM could give us numbers like this today, we’d be pleased.
S & P 1040 is an obvious support level. However, the idea that it is a “head and shoulder top” pattern ignores the other requirements for such a pattern. First of all, the market climb to 1150 was a gradual rise with modestly higher highs on weaker volume. “Left shoulders” should rise rapidly and on significant volume. The April peak was a rally that was both more aggressive and on better Breadth and Volume statistics. The so-called “head” lacked the negative divergence of its component data that would then be the catalyst for the failed rally. Instead, the correction we saw was aggressive, challenging the 1040 level to make the “neckline”. This set up the oversold bounce that has been viewed as a “right shoulder”. While volume was light on this advance, it appeared to be more of a bounce in a base-building pattern. Breaking below 1040 does break “support”, but the pattern is not necessarily a head and shoulders top, which carries with it the implication of the start of a prolonged down trend. If it were a head and shoulders top, the range (1040 – 1220) would project to 860, which is the target put out by Goldman Sachs’ analyst. I see this as too dire a prediction and many are reading into the pattern a more ominous top. I don’t think this is a head and shoulder top. The recent high swung 25 points above resistance. A “swing rule” break would take us to 1015 as the next support. That also happens to be right about the high following the breakout of the 2008/2009 base below 950. The current downtrend has support at 979. Therefore, there are “stair-step” support points all the way down.
I still think that earnings produce a rally in July. The target was 1150 – 1170. That may be harder to achieve now, but we may give it a go. As we push on into early fall, we are expecting another wave lower. This will be driven by still weak economic data, but made worse by the fact that we will be facing a down fiscal year for those using September. Down years often put pressure on September, as portfolio managers scramble to get rid of losers and put in a few winning names. It is also election season in October. With it comes uncertainty as to who wields the power in the Senate. The mud will fly heading into the elections, typically sidelining large investment types. Our target for September/October is 950. In our Cantor Global Outlook 2010 piece written back in November/December 2009, we were looking for a high of 1200 and then a fall correction of 15% - 20%. A 20% correction would target 960 by October. We have not deviated from that projection. Our target at the time was to finish 2010 at 1224, a strong bull market rally off of that October low. This expectation remains intact for yearend.
We’ll see how much traders want to read into the S & P breaking 1040 on the final trading day of the quarter. If the shorts don’t get an increase in the level of panic, they may wish to cover quickly. Even as the S & P rolled over, the Volatility Index, VIX, traded lower for all but in the final few seconds of trading. Where’s the fear? The fact is that the market has been moving to discount disappointment for the past two months. Perhaps the reality isn’t quite as bad as the preparation. The end-of-quarter unwinding put pressure on stocks in the final half hour. Today will be the test. If the ISM is anything like the Chicago PMI, the shorts will get frustrated that breaking 1040 did not give them the gift they were all hoping for. Don’t stand by the exits. I think the bears could make a run for it today or tomorrow. After all, everyone is expecting bad news from Euro-zone banks, Chinese growth, today’s ISM, tomorrow’s jobs, and even earnings. We broke 1040. All of this bad news, if it doesn’t create a panic, should result in short covering.